- Risk transfer transaction encompassing 40% of Lincoln’s
universal life with secondary guarantees (“ULSG”) in-force, in
addition to MoneyGuard® and fixed annuities
- Reduces Lincoln’s exposure to Life Insurance in-force long-term
assumption risk and lowers invested asset leverage
- Expected to improve the risk-based capital (“RBC”) ratio by
approximately 15 points at closing
- Expected to increase annual free cash flow1 by over $100
million
- Continued demonstration of executing on our strategic
initiatives and our objectives to de-risk and strengthen the
balance sheet and maximize distributable earnings
- In addition, Lincoln announces preliminary first quarter 2023
results
Lincoln Financial Group (NYSE: LNC) and Fortitude Reinsurance
Company Ltd. (“Fortitude Re”) today announced that they have
entered into an agreement under which Lincoln will cede
approximately $28 billion of in-force ULSG, MoneyGuard and fixed
annuity statutory reserves to Fortitude Re.
The reinsured block consists of approximately $9 billion of ULSG
statutory reserves, or about 40% of Lincoln’s total in-force ULSG,
nearly $12 billion of MoneyGuard statutory reserves, or about 80%
of Lincoln’s total in-force MoneyGuard, and nearly $8 billion of
fixed annuities statutory reserves, or about 40% of Lincoln’s total
in-force fixed annuities.
“Today’s transaction with Fortitude Re marks significant
progress in our efforts to reduce our balance sheet risk, improve
our capital position and increase ongoing free cash flow,” said
Ellen Cooper, president and CEO of Lincoln Financial Group. “With
our leadership team in place, we are rapidly executing on actions
to fortify our balance sheet, and we remain committed to further
enhancing the pace of capital generation and long-term profitable
growth.”
The transaction is expected to improve our capital position and
be accretive to ongoing free cash flow:
- A higher RBC ratio upon closing of approximately 15 percentage
points.
- Incremental ongoing free cash flow of over $100 million per
year.
The transaction is expected to be dilutive on a GAAP basis with
the following estimated financial impacts:
- A negative quarterly impact to adjusted operating income of
($35–40) million.
- This includes a ($30–35) million impact in Life Insurance and a
($5) million impact in Annuities.
The transaction is subject to customary closing conditions,
including regulatory approvals, and is anticipated to close in the
second quarter of 2023 with an effective date of April 1, 2023.
The transaction is structured as a coinsurance treaty between
Lincoln and Fortitude Re for the ULSG and fixed annuity blocks, and
as coinsurance with funds withheld for the MoneyGuard block, with
counterparty protections including a comfort trust established by
Fortitude Re subject to investment guidelines to meet Lincoln’s
risk management objectives. Fortitude Re is an authorized Bermuda
reinsurer with reciprocal jurisdiction reinsurer status in
Indiana.
Under the terms of the reinsurance agreement, Lincoln will
retain account administration and recordkeeping of the policies
including claims management. The transaction will have no impact on
Lincoln’s commitments to its distribution partners and
policyholders. Additionally, Lincoln remains focused on the
continued growth of its Life Insurance and Annuities
businesses.
Lazard acted as financial advisor and Sidley Austin LLP served
as legal advisor to Lincoln.
Preliminary first quarter 2023 results
In addition to today’s block reinsurance transaction
announcement, Lincoln also provided preliminary estimates for first
quarter 2023 results. These preliminary first-quarter estimates do
not affect our previously communicated 2023 outlook for
distributable earnings or free cash flow. The Company expects:
- Estimated net loss available to common stockholders of between
($919) and ($904) million, or ($5.43) to ($5.34) per diluted share.
This estimate includes unfavorable impacts from the new accounting
for market risk benefits (“MRBs”) as a result of the recent
adoption of LDTI2, including a portion of MRB and hedge instrument
fair value changes which sum to approximately ($1) billion. The
estimated net loss excludes a favorable MRB-related item that flows
through Accumulated Other Comprehensive Income (“AOCI”) of
approximately $1 billion and which approximately offsets the
combined MRB and hedge instrument fair value impacts on total
stockholders’ equity.
- Estimated adjusted income from operations available to common
stockholders of between $250 and $265 million, or $1.47 to $1.56
per diluted share. This includes an estimated Life Insurance
operating loss of between ($23) and $(8) million. These results
reflect the 2023 headwinds the Company has previously discussed,
such as higher expenses and lower prepayment income, and, in Life
Insurance specifically, also higher reinsurance costs and lower
base spreads.
- Estimated first-quarter RBC ratio of between 377% and 380%,
versus 377% at year-end 2022.
Conference Call Information
Lincoln Financial Group will host an investor call at 4:30 P.M.
Eastern Time today, Tuesday, May 2, to discuss this announcement. A
presentation is available on the company’s Investor Relations web
page at www.lincolnfinancial.com/investor.
The conference call will be broadcast live through the company
website at www.lincolnfinancial.com/webcast.
Please log on to the webcast at least 15 minutes prior to the
start of the conference call to download and install any necessary
streaming media software. A replay of the call will be available by
8:00 P.M. Eastern Time tonight at
www.lincolnfinancial.com/webcast.
About Lincoln Financial Group
Lincoln Financial Group provides advice and solutions that help
people take charge of their financial lives with confidence and
optimism. Today, approximately 16 million customers trust our
retirement, insurance and wealth protection expertise to help
address their lifestyle, savings and income goals, and guard
against long-term care expenses. Headquartered in Radnor,
Pennsylvania, Lincoln Financial Group is the marketing name for
Lincoln National Corporation (NYSE:LNC) and its affiliates. The
company had $282 billion in end-of-period account balances as of
December 31, 2022. Lincoln Financial Group is a committed corporate
citizen included on major sustainability indices including the Dow
Jones Sustainability Index North America and ranks among Newsweek’s
Most Responsible Companies. Dedicated to diversity, equity and
inclusion, we are included on transparency benchmarking tools such
as the Corporate Equality Index, the Disability Equality Index and
the Bloomberg Gender-Equality Index. Committed to providing our
employees with flexible work arrangements, we were named to
FlexJobs’ list of the Top 100 Companies to Watch for Remote Jobs in
2022. With a long and rich legacy of acting ethically, telling the
truth and speaking up for what is right, Lincoln was recognized as
one of Ethisphere’s 2022 World’s Most Ethical Companies®. We create
opportunities for early career talent through our intern
development program, which ranks among WayUp and Yello’s annual
list of Top 100 Internship Programs. Learn more at:
www.LincolnFinancial.com. Follow us on Facebook, Twitter, LinkedIn,
and Instagram. Sign up for email alerts at
http://newsroom.lfg.com.
Explanatory Notes on Use of Non-GAAP
Measures
Management believes that adjusted income (loss) from operations
(adjusted operating income (loss)) and adjusted operating EPS
better explain the results of the company’s ongoing businesses in a
manner that allows for a better understanding of the underlying
trends in the company’s current business because the excluded items
are unpredictable and not necessarily indicative of current
operating fundamentals or future performance of the business
segments, and, in many instances, decisions regarding these items
do not necessarily relate to the operations of the individual
segments. In addition, we believe that our definition of adjusted
income (loss) from operations provides investors with a more
valuable measure of our performance as it better reveals trends in
our business.
Reconciliations of the non-GAAP measures used in this press
release to the most directly comparable GAAP measure are included
in this Appendix to the press release.
Definitions of Non-GAAP Measures Used
in this Press Release
Adjusted income (loss) from operations is a financial measure we
use to evaluate and assess our results. Adjusted income (loss) from
operations, as used in the press release, is a non-GAAP financial
measure and does not replace GAAP net income (loss) the most
directly comparable GAAP measure.
Adjusted Income (Loss) from Operations
Adjusted income (loss) from operations is GAAP net income (loss)
excluding the after-tax effects of the following items, as
applicable:
- Changes in market risk benefits (“MRBs”), including gains and
losses and benefit payments (“MRB-related impacts”);
- Investment and reinsurance-related realized gain (loss):
- Changes in the carrying value of mortgage loans on real estate
attributable to current expected credit losses (“CECL”) (“changes
in CECL reserve for mortgage loans on real estate”);
- Changes in the carrying value of reinsurance-related assets
attributable to CECL (“changes in CECL reserve for
reinsurance-related assets”);
- Changes in the carrying value of fixed maturity AFS securities
attributable to the estimation of credit losses (“changes in the
credit loss allowance for fixed maturity AFS securities”); and
- Changes in the fair value of investments, including trading
securities, equity securities, certain derivatives, and mortgage
loans on real estate electing the fair value option, and of
embedded derivatives within certain reinsurance arrangements, as
well as sales or disposals of investments (“changes in investments
and reinsurance-related embedded derivatives”);
- Changes in the fair value of the derivative instruments we hold
to hedge GLB and GDB riders, net of fee income allocated to support
the cost of hedging them (“changes in fair value of GLB and GDB
hedge instruments, net of hedge allowance”);
- Changes in the fair value of the embedded derivative
liabilities of our indexed annuity and indexed universal life
insurance contracts and the associated index options we hold to
hedge them, including collateral expense associated with hedge
programs; (“indexed product net derivative results”);
- Changes in reserves resulting from benefit ratio unlocking on
variable universal life insurance products with secondary
guarantees (“benefit ratio unlocking”);
- Income (loss) from the initial adoption of new accounting
standards, regulations and policy changes;
- Income (loss) from reserve changes, net of related
amortization, on business sold through reinsurance;
- Transaction and integration costs related to mergers and
acquisitions including the acquisition or divestiture, through
reinsurance or other means, of businesses or blocks of
business;
- Gains (losses) on modification or early extinguishment of
debt;
- Losses from the impairment of intangible assets and gains
(losses) on other non-financial assets; and
- Income (loss) from discontinued operations.
Lincoln National
Corporation
Reconciliation of Net Loss to
Adjusted Income from Operations
For the Three
(in millions, except per share data)
Months Ended
March 31,
2023
Net Income (Loss) Available to Common
Stockholders – Diluted
$
(919) to (904)
Less:
Preferred stock dividends declared
(25)
Adjustment for deferred units of LNC stock
in our deferred compensation plans (1)
(3)
Net Income (Loss)
(891) to (876)
Less:
MRB-related impacts, after-tax(2)
(516) to (501)
Change in fair value of GLB and GDB hedge
instruments, net of hedge allowance, after-tax
(387) to (372)
Derivative, reinsurance-related embedded
derivative, and investment losses, including indexed product net
derivative results and benefit ratio unlocking, after-tax
(297) to (282)
Total adjustments
(1,180) to (1,165)
Adjusted Income (Loss) from
Operations
$
279 to 294
Add:
Preferred stock dividends declared
(25)
Adjustment for deferred units of LNC stock
in our deferred compensation plans (1)
(3)
Adjusted Income (Loss) Available to
Common Stockholders – Diluted
$
250 to 265
Earnings (Loss) Per Common Share –
Diluted (3)
Net income (loss)
$
(5.43) to (5.34)
Adjusted income (loss) from operations
1.47 to 1.56
(1) We exclude deferred units of LNC stock
that are antidilutive from our diluted earnings per share
calculation.
(2) This reconciliation includes the
portion of the MRB impact that is within Net Income. The remainder
of the MRB change impacts Accumulated Other Comprehensive Income
(AOCI). For the three months ended March 31, 2023, this portion
impacting AOCI was a favorable $1,015 to $1,030, after-tax.
(3) Due to an expectation of a net loss
for the three months ended March 31, 2023, basic shares were used
in the net income (loss) diluted EPS calculation as the use of
diluted shares would have resulted in a lower loss per share.
FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE
Certain statements made in this press release are
“forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (“PSLRA”). A
forward-looking statement is a statement that is not a historical
fact and, without limitation, includes any statement that may
predict, forecast, indicate or imply future results, performance or
achievements. Forward-looking statements may contain words like:
“anticipate,” “believe,” “estimate,” “expect,” “project,” “shall,”
“will” and other words or phrases with similar meaning in
connection with a discussion of future operating or financial
performance. In particular, these include statements relating to
future actions, performance or financial results, including the
closing of the block reinsurance transaction and the timing
thereof, the expected impact of the transaction on our risk
profile, RBC ratio, free cash flow and adjusted operating income,
our preliminary estimates for our first quarter 2023 results and
estimated first quarter RBC ratio. Lincoln claims the protection
afforded by the safe harbor for forward-looking statements provided
by the PSLRA.
Forward-looking statements are subject to risks and
uncertainties. Actual results could differ materially from those
expressed in or implied by such forward-looking statements due to a
variety of factors, including:
- Weak general economic and business conditions that may affect
demand for our products, account balances, investment results,
guaranteed benefit liabilities, premium levels and claims
experience;
- Adverse global capital and credit market conditions that may
affect our ability to raise capital, if necessary, and may cause us
to realize impairments on investments and certain intangible
assets, including goodwill and the valuation allowance against
deferred tax assets, which may reduce future earnings and/or affect
our financial condition and ability to raise additional capital or
refinance existing debt as it matures;
- The inability of our subsidiaries to pay dividends to the
holding company in sufficient amounts, which could harm the holding
company’s ability to meet its obligations;
- Legislative, regulatory or tax changes, both domestic and
foreign, that affect: the cost of, or demand for, our subsidiaries’
products; the required amount of reserves and/or surplus; our
ability to conduct business and our captive reinsurance
arrangements as well as restrictions on the payment of revenue
sharing and 12b-1 distribution fees;
- The impact of U.S. federal tax reform legislation on our
business, earnings and capital;
- The impact of regulations adopted by the Securities and
Exchange Commission (“SEC”), the Department of Labor or other
federal or state regulators or self-regulatory organizations
relating to the standard of care owed by investment advisers and/or
broker-dealers that could affect our distribution model;
- The impact of new and emerging privacy regulations that may
lead to increased compliance costs and reputation risk;
- Increasing scrutiny and evolving expectations and regulations
regarding ESG matters that may adversely affect our reputation and
our investment portfolio;
- Actions taken by reinsurers to raise rates on in-force
business;
- Declines in or sustained low interest rates causing a reduction
in investment income, the interest margins of our businesses and
demand for our products;
- Rapidly increasing interest rates causing policyholders to
surrender life insurance and annuity policies, thereby causing
realized investment losses;
- The impact of the implementation of the provisions of the
European Market Infrastructure Regulation relating to the
regulation of derivatives transactions;
- The initiation of legal or regulatory proceedings against us,
and the outcome of any legal or regulatory proceedings, such as:
adverse actions related to present or past business practices
common in businesses in which we compete; adverse decisions in
significant actions including, but not limited to, actions brought
by federal and state authorities and class action cases; new
decisions that result in changes in law; and unexpected trial court
rulings;
- A decline or continued volatility in the equity markets causing
a reduction in the sales of our subsidiaries’ products; a reduction
of asset-based fees that our subsidiaries charge on various
investment and insurance products; and an increase in liabilities
related to guaranteed benefit riders, which are accounted for as
market risk benefits, of our subsidiaries’ variable annuity
products;
- Ineffectiveness of our risk management policies and procedures,
including our various hedging strategies;
- A deviation in actual experience regarding future policyholder
behavior, mortality, morbidity, interest rates or equity market
returns from the assumptions used in pricing our subsidiaries’
products and in establishing related insurance reserves, which may
reduce future earnings;
- Changes in accounting principles that may affect our
consolidated financial statements;
- Lowering of one or more of our debt ratings issued by
nationally recognized statistical rating organizations and the
adverse effect such action may have on our ability to raise capital
and on our liquidity and financial condition;
- Lowering of one or more of the insurer financial strength
ratings of our insurance subsidiaries and the adverse effect such
action may have on the premium writings, policy retention,
profitability of our insurance subsidiaries and liquidity;
- Significant credit, accounting, fraud, corporate governance or
other issues that may adversely affect the value of certain
financial assets, as well as counterparties to which we are exposed
to credit risk, requiring that we realize losses on financial
assets;
- Interruption in telecommunication, information technology or
other operational systems or failure to safeguard the
confidentiality or privacy of sensitive data on such systems,
including from cyberattacks or other breaches of our data security
systems;
- The effect of acquisitions and divestitures, restructurings,
product withdrawals and other unusual items;
- The inability to realize or sustain the benefits we expect
from, greater than expected investments in, and the potential
impact of efforts related to, our strategic initiatives, including
the Spark Initiative;
- The adequacy and collectability of reinsurance that we have
obtained;
- Pandemics, acts of terrorism, war or other man-made and natural
catastrophes that may adversely impact liabilities for policyholder
claims, affect our businesses and increase the cost and
availability of reinsurance;
- Competitive conditions, including pricing pressures, new
product offerings and the emergence of new competitors, that may
affect the level of premiums and fees that our subsidiaries can
charge for their products;
- The unknown effect on our subsidiaries’ businesses resulting
from evolving market preferences and the changing demographics of
our client base; and
- The unanticipated loss of key management, financial planners or
wholesalers.
The risks and uncertainties included here are not exhaustive.
Our most recent Form 10-K, as well as other reports that we file
with the SEC, include additional factors that could affect our
businesses and financial performance. Moreover, we operate in a
rapidly changing and competitive environment. New risk factors
emerge from time to time, and it is not possible for management to
predict all such risk factors.
Further, it is not possible to assess the effect of all risk
factors on our businesses or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of
actual results. In addition, Lincoln disclaims any obligation to
update any forward-looking statements to reflect events or
circumstances that occur after the date of this press release.
The reporting of Risk-Based Capital (“RBC”) measures is not
intended for the purpose of ranking any insurance company or for
use in connection with any marketing, advertising or promotional
activities.
________________ 1 Free cash flow is the sum of distributable
earnings across all business units and legal entities, less holding
company interest expenses and preferred dividends. 2 Accounting
Standards Update 2018-12, Targeted Improvements to the Accounting
for Long-Duration Contracts.
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Al Copersino (800) 237-2920 Investor Relations
InvestorRelations@LFG.com
Kelly Capizzi (484) 538-7824 Media Relations
Kelly.Capizzi@LFG.com
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